one more of those "omg the irs!" threads
i'm always curious about this. why do we pay taxes in the city we live and the city we work in? can the tax paid to one be deducted from the other?
additionally, i started paying on my college loans this year. do i get any type of deduction for that? i'm keeping all the records of what i paid and when and with what check number.
i'm used to doing my own taxes, but it was easier when i was in college and only working one job and being my parents' dependant! how much would seeing a CPA to sort this all out cost me?
what if i end up owing money and can't pay? and lastly, taxes were withheld from my federal work study. i never really looked into it too much, but i was told when i was hired that work study is not federally taxable. it's like the federal government taking away what they just gave you.
Re: one more of those "omg the irs!" threads
adding:
oh, nevermind. i just found out work study is taxable income.
which is weird. the government gave it to me.
Re: one more of those "omg the irs!" threads
Quote:
'm always curious about this. why do we pay taxes in the city we live and the city we work in? can the tax paid to one be deducted from the other?
If you're referring to state income taxes and city income taxes, the reason that some states and cities collect these is that they either have too few 'private' property owners to tax in order to cover state/local gov't expenditures, or because they simply can't seem to control the amount of money they spend and have to tap resident's incomes as well as property to feed the spending habit. Not to get political, but the major expenditure segments for state/local gov't's are welfare/medicaid payments and weekly paychecks of gov't workers. Therefore if a state/city offers fairly generous benefits and has lots of gov't agencies, you can be pretty sure they also have tax people turning over rocks looking for additional tax revenue.
As to deductibility, for the moment at least the IRS allows people to deduct the payment of state and local income taxes and property taxes from their federal tax liability. However, the federal commission on tax reform has recently come out with a recommendation that the rules be changed in the future. From a federal standpoint, the argument of the commission is that the current deductibility of state and local taxes allows residents of high tax states like CA and NY to avoid paying their 'fair share' of federal taxes. From a state standpoint, such a rule change will be devastating as it will basically represent a 5% federal tax increase for middle class residents of CA, NY etc. due to the loss of the deduction.
Student loan interest, like credit card interest or any other form of interest OTHER than home ownership mortgage interest, is NOT tax deductible. The home mortgage interest tax deduction is a 'special incentive' put in place by the federal gov't to encourage more people to buy their own homes instead of renting. The commission on tax reform also brought up the issue that this constitutes an 'unfair' situation vs renters and proposed changing the IRS rules in the future as well. However, as homeowners across the country would immediately flip out, the odds of the mortgage deduction being phased out are much lower than the odds of the state/local income tax deduction being phased out (since the angry current beneficiaries live in a handful of high tax states, while taxpayers in the majority of low tax states would actually benefit from decreased federal income tax bills as NY CA residents paid more)
Re: one more of those "omg the irs!" threads
Correction of a Melonie statement.
Student loan inteest CAN be tax deductable.
http://www.irs.gov/faqs/faq-kw187.html
Quote:
3.2 Itemized Deductions/Standard Deductions: Education & Work-Related Expenses
What are the limits for deducting interest paid on a student loan?
The maximum deductible interest on a qualified student loan is $2,500 per return. If you are a taxpayer whose return status is married filing jointly, you are allowed to deduct the full $2,500 only when your Modified Adjusted Gross Income (MAGI) is $100,000 or less. If your MAGI is between $100,000 and $130,000, the amount of your student loan interest deduction is gradually reduced. The instructions for
Form 1040 (PDF) show you how to compute the deduction. If your MAGI is $130,000 or more, you are not able to take any deduction.
Local jurisdictions can tax what the local voters let them. This differs by state, with some towns only able to tax wages where earned, and others able to tax income where you live. Offsets depend on who has the clout in the state legislature and are made more complex if you cross state lines as well.
A tax bill is like other bills, it is your issue if you rack it up then feel you cannot pay. You still owe the bill, and they want the money, so if they are nice they will let you pay off an unpaid balance later over time(as well as new taxes). The point is to never get behind the curve and stay current, or you will spend money you later regret.
Work study is income that is taxed. Government employees pay taxes on their wages too because, until youfile, they have no idea if your other income is $20 or $20 million.
A CPA is a educated knowledgeable proffessional who charges a fee just like a doctor or lawyer. Whether it is worth the fee is going to depend on a lot of unavailable information - amounts, # of issues, your knowledge, and how you learn crap like this. I would start at http://www.irs.gov/app/understandingTaxes/index.jsp
and see how much you can absorb. Odds are within 2 hours you will either say "I can do that" or "I am over my head and need a professional".
Either that or start with the 1040 and read through ALL the instructions and cross off the parts which have no bearing on you (like moving expenses when you did not move. Take tons of notes for yourself and use a highlighter. It is like rebuilding a carbeaurator--if you know how it is not hard--if it is 3am and by the side of the road you are up the creek. Learn how before you get to that point.
Re: one more of those "omg the irs!" threads
I think there is a limit to how many years you can take the student loan interest deduction....like 5, IIRC. This is ridiculous though. Most people spend much longer paying it off. And like Monty said, the amount you get back is based on what you make. So for someone making $50,000 a year (which, isn't much consider you went to college), you barely see a difference.
It's one of those deductions that really isn't much of a deduction at all. You aren't even paying that much interest to deduct in most cases (which isn't a bad thing!)
I live in a suburban that collects taxes from homeowners (property and school tax), and then there is a wage tax (usually 1%). Is that what you're talking about? I know that Philadelphia collects something 2% if you live there (even if you rent), 2% if you work there, and 4% if it's both. That's on top of property taxes. Eek!
Re: one more of those "omg the irs!" threads
Monty you're absolutely correct ...
"For those whose filing status is single, head of household, or qualifying widow(er), the full $2,500 deduction is allowed for MAGI levels equal to or below $50,000. For MAGI between $50,000 and $65,000, the deduction amount is phased out, and computation instructions are provided in the Form 1040 Instructions. If your MAGI amount is $65,000 or more, there is no deduction."
I guess that I have always been over the $65k limit which is the reason my accountant never attempted to take this deduction.
In regard to state and city income taxes, here's a couple for comparison purposes. In Texas or Nevada or Florida there are no state income taxes and no city income taxes to the best of my knowledge. This means that a dancer who earns say $60k a year probably pays 25% or $15k in federal income taxes. On the other hand, in New York City, a dancer who earns say the same $60k must pay about a 7.5% NY state income tax plus about a 2.5% city income tax, totalling 10% or $6k per year. But at the same time those state and local taxes are deductible from her federal return, meaning that her federal taxes are more like 20% or $12k instead of $15k. Overall, the NYC dancer winds up paying perhaps $18k in income taxes versus $15k for a dancer in Texas or Nevada or Florida earning the same amount of money. (obviously many assumptions factor into my example numbers, but the basic point is accurate).
The argument advanced by the Tax Reform Commission is why shouldn't both the NYC dancer and the Texas dancer pay $13.5k in federal taxes on the same $60k income, instead of one paying $15k while the other pays $12k, when the basic services provided by the federal gov't to dancers in both states are the same and when none of the money collected in NY state and city income taxes is spent outside of New York to benefit the Texas dancer ? If the Tax Reform Commission's recommendation was followed and the federal tax deduction for state/local income taxes was terminated, in theory it would mean that the Texas dancer's taxes would drop to $13.5k, whereas the NYC dancer's taxes would increase to $19.5k. In reality, the Texas dancer's federal income tax would probably stay at the $15k level, but the NYC dancer's total taxes would increase from $18k to $21k, because the IRS would probably not revise the federal tax rate tables to compensate everyone in states with low/no state or local income taxes for the extra federal tax revenue coming from NY, CA etc if their state/local income taxes were no longer deductible !
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Re: one more of those "omg the irs!" threads
Emily.
I agree that the deduction is limited and not as big as one would think, but at 50k taxable income you are in the 25% bracket so 25% of $2500 is still $625. For most that is more than a car payment and more than a day's gross income dancing. for someone with $40k in college loans, at 6% and a 10-year term that pays about a month and a half student loan payment per year. Plowed back as an extra payment it could knock the term of the loan down over a year and one is free in less than 9 years, or it pays a quarter of the interest for you per year--not exactly chump change. If reduced because your loan is small or income high, amounts would be reduced of course.
Re: one more of those "omg the irs!" threads
Quote:
Originally Posted by Melonie
snip
In regard to state and city income taxes, here's a couple for comparison purposes. In Texas or Nevada or Florida there are no state income taxes and no city income taxes to the best of my knowledge. This means that a dancer who earns say $60k a year probably pays 25% or $15k in federal income taxes. On the other hand, in New York City, a dancer who earns say the same $60k must pay about a 7.5% NY state income tax plus about a 2.5% city income tax, totalling 10% or $6k per year. But at the same time those state and local taxes are deductible from her federal return, meaning that her federal taxes are more like 20% or $12k instead of $15k. Overall, the NYC dancer winds up paying perhaps $18k in income taxes versus $15k for a dancer in Texas or Nevada or Florida earning the same amount of money. (obviously many assumptions factor into my example numbers, but the basic point is accurate).
The argument advanced by the Tax Reform Commission is why shouldn't both the NYC dancer and the Texas dancer pay $13.5k in federal taxes on the same $60k income, instead of one paying $15k while the other pays $12k, when the basic services provided by the federal gov't to dancers in both states are the same and when none of the money collected in NY state and city income taxes is spent outside of New York to benefit the Texas dancer ? If the Tax Reform Commission's recommendation was followed and the federal tax deduction for state/local income taxes was terminated, in theory it would mean that the Texas dancer's taxes would drop to $13.5k, whereas the NYC dancer's taxes would increase to $19.5k. In reality, the Texas dancer's federal income tax would probably stay at the $15k level, but the NYC dancer's total taxes would increase from $18k to $21k, because the IRS would probably not revise the federal tax rate tables to compensate everyone in states with low/no state or local income taxes for the extra federal tax revenue coming from NY, CA etc if their state/local income taxes were no longer deductible !
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Melonie's differential is corrrect between the two taxes because both are in the same bracket, but she glosses over the difference between average and marginal tax rates in her tax calculations. A $60 K AGI would pay $11,650 in taxes in 2005 whereas a $54K AGI (because income is lowered by $6K for local taxes) would pay $10,165. HEr point about the Commisions point is right, however.
The unmentioned fact is that elimination of tax deductability for local taxes would also turn more folks into anti-tax voters at the local level when 100% of a tax increase comes from the payer's hide.